Power Hour: Discount Forecasts of Corn Price Extremes

02:45PM Jun 28, 2013
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Wild estimates have been circulating on what corn prices for the 2013/14 marketing year could end up being given everything in play, but it’s wise to discount both high and low extremes.
"I give a 10% chance of $7 corn in the year ahead and a 2% odds of $3.50 corn," says Frayne Olson, ag economist at North Dakota State University. "Can I make a case for both, sure, and both are possible, though highly improbable."
To reach $7/bu., it would take a major weather event, such as a high pressure ridge settling over Iowa and Illinois in July and August, affecting pollination and filling. Although most soils in the heartland have been recharged, heavy rains have produced root systems that are generally shallow, so if weather is hot and dry during pollination, futures markets would respond quickly.
However, Olson gives such a scenario low probabilities. For $3.50 corn, it would take yields higher than present forecasts, an extremely weak global economy and weak exports. A combination of factors certainly could create $3.50 corn, but it’s even more improbable than $7 corn, Olson says.
He looks for world GDP, excluding the U.S., to grow at a 2.5% to 3% clip the next two years, which is slightly softer than the last three years at 3.5% to 4%.
China will grow at 7.5% to 8.5%, which is lower than the 8% to 10% during the past three years, he predicts. Only modest growth is likely in the U.S. and possibly just 1% in Europe. This does not spell doomsday for global corn exports.
Most likely, Olson believes corn prices in the marketing year ahead will average $5.25 to $5.75 per bushel for the 2013 crop.
He’s more optimistic than USDA, whose current price forecast is $4.40 to $5.20 (June WASDE). His reason why: USDA’s yield forecast of 156.5 bushels per acre, and the 155 yield of many private forecasters, are too optimistic given early problems with the corn crop.
Olson thinks a 150 to 152 bushel per acre yield is more realistic. "Even so, yields of 150 on 95 million acres will produce a lot of corn," he adds. Additionally, it might take several years for demand to come back, which can limit big upward price moves. In the meantime, he looks for 2014 corn acres to fall by as much as 5 million acres.
 "How I see the next decade is several year periods of $4.50 to $5.50, but then shorter periods of production problems somewhere where prices could shoot back up to $7 to $7.50, then back down," he says. With low global stocks to use, he thinks volatility is here to stay.